Finmeccanica transforms its 787 fortunes

Alenia Aermacchi parent Finmeccanica is expressing buoyant confidence in its work for the 787 Dreamliner – a programme which two years ago was probably the "worst" in company history but today stands for a "strong customer relationship with Boeing and continuously rising profitability".

In the third quarter of 2011, Finmeccanica took a €753 million charge against its 787 involvement: €161 million against likely non-compliance penalties relating to substandard work on fuselage barrels and horizontal stabilisers, and €592 million to reflect reassessment of total programme costs. But now, says chief executive Alessandro Pansa, "we are receiving congratulations from Boeing on the way we fixed the business and are delivering the shipsets we are responsible for".

That improvement, adds Pansa, is a "crucial validation" of Alenia’s capabilities. With the 787 problem fixed, he says, those capabilities represent more opportunities.

Addressing analysts following publication of encouraging third-quarter results, chief financial officer Gian Piero Cutillo added that the real strength of the 787 programme for Finmeccanica is its "continuing increase in profitability".

Better 787 performance, improved delivery performance on ATR turboprop fuselages and restructuring, including the closing of two facilities in Italy, have helped "stabilise" the profitability of the aeronautics division at 5-6% of revenue, Pansa told analysts.

In fact, for the third quarter, the aeronautics division – which today includes the amalgamated Alenia companies – boosted revenue 4.2% to €710 million and more than trebled operating profit to €79 million, for an operating margin of 11%. Over nine months, division revenue was up 8.6% at €2.17 billion and operating profit nearly doubled, to €130 million.

Finmeccanica’s "roadmap" calls for further improvement to 7-8%, Pansa says, adding that while there are no quick fixes for either the division or the group, the company has made huge progress over the past year. Finmeccanica was left reeling by its disastrous 2011 – when the 787 writedowns and losses at its energy and road/rail transport divisions pushed the group to a €2.3 billion net loss. These troubles, including ongoing losses at the energy and transport units, have left Finmeccanica with a debt drag that stood at €3.4 billion at the end of 2012.

The company is also suffering from allegations that it resorted to bribery to seal a €560 million contract for the sale of 12 VVIP versions of its AgustaWestland AW101 helicopter to India. The investigation, including a probe by Italian prosecutors, has brought down several Finmeccanica executives, including Pansa’s predecessor as chief executive, Giuseppi Orsi, who was also chairman.

The Indian air force had taken delivery of three of the helicopters before suspending the contract, and with another three completed and at least six in an advanced state of completion, Finmeccanica is also feeling a cash crunch over the issue: full-year 2013 accounts will show some €400 million in cash outflow, as suppliers have been paid.

Pansa, however, is optimistic that the India scandal can be resolved. Three of the AW101s built for India have been sold to other, unspecified, customers so some of the cash is being recovered. And, an arbitration process has begun with the Indian government to resolve the contract issue. Pansa believes Finmeccanica has shown the good faith needed to move forward and, he notes, the three helicopters delivered to India have been in service and performing as promised.

If normal commercial relations can be restored with India, Finmeccanica could reasonably claim to have pushed most of the way through its strategic response to the longstanding structural troubles that were so starkly highlighted by its 2011 annus horibilis. Pansa says the plan – to restructure as an aerospace and defence group based on aeronautics, AgustaWestland helicopters, space and defence electronics and security (the now-amalgamated Selex businesses and, in North America, DRS Technologies) – cannot be achieved "overnight" in such a capital-intensive industry.

But the numbers are going in the right direction. A year ago, says Pansa, "most of our core businesses were losing money". At the nine-month mark in 2013, helicopters revenue was up 1.2% at just over €3 billion and operating profit was up 20% at €402 million. In space, sales were up 4.6% to €729 million and profit gained nearly a quarter, to €51 million. Defence electronics slipped to a loss of €39 million, compared with a €152 million profit last time, but the business is meeting expectations in a tough military spending environment, says Pansa.

A sale of the Ansaldo Energia business, agreed in October, should close by year-end. Only the Ansaldo Breda rolling-stock business remains as a financial threat. Pansa makes very clear, though, that while talks over its sale have come to nought, the Breda business will not be allowed to "jeopardise" the solid work that has been done with the core aerospace and defence business. Shutting down Breda appears to be ruled out – Pansa stresses that Finmeccanica would not "do something socially unacceptable" – but while existing contracts will be honoured, no new contracts will be accepted that are not profitable.

In any case, he says, before the Ansaldo Energia deal was reached aerospace and defence accounted for 86% of Finmeccanica’s revenue; when the deal closes, A&D will be 91% of the total, with the rest in rolling stock and the Ansaldo STS rail-switching and network-controls business, which is sound.